Investors in Puerto Rico‘s debt, including hedge funds, are meeting in New York on Thursday with restructuring specialists as a moratorium on payments on the territory’s $70bn in public sector debt and an additional $40bn of unfunded pension liabilities appears increasingly likely, these specialists say.

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The territory’s debt service burden requires it to pay between $3.4bn and $3.8bn each year for the next four years. As doubts grow about the ability of the commonwealth to service that debt, the cost of doing so will inevitably rise.
“The numbers are untenable,” said one restructuring adviser. “To issue new debt the yield would have to rise and where they can’t raise new money they will have to stop paying.”

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Puerto Rico is likely to struggle to lift taxes much more. According to a document due to be presented at Thursday’s meeting, Puerto Rico’s debt per capita is more than $14,000, while income per capita is almost $17,000, a ratio of 83 per cent. California, Illinois and New York each have a debt to personal income ratio of 6 per cent, according to the document.

Puerto Rico’s unemployment rate of 14 per cent is more than twice the national average.

What would make a Puerto Rico default more interesting is that as in the case of GM, political infighting would promptly take precedence over superpriority and waterfall payments. According to the FT, "any radical step, which the local government denies considering, would involve significant legal wrangling. Congress could step in and create an insolvency regime, lawyers say, since it has comprehensive jurisdiction, but that too would give rise to partisan fighting. The Democrats would say that pension claims have priority while the Republicans would uphold the priority of payments to bondholders, citing the constitutional sanctity of contracts."

Of course, since in the US a bond contract now is only worth the number of offsetting votes it would cost, nobody really knows what will happen. And so, we sit back and watch, as yet another muni quake appears set to hit the US, in the process obviously sending the S&P to higher, record highs.